Explanation:
To calculate the rate charged for the contingent liquidity risk of the credit line, we must determine the expected cost of funding the likely drawdown and then allocate that cost across the entire credit limit.
Calculate the Undrawn Amount:
Undrawn Amount = Total Limit - Already Drawn Amount
Undrawn Amount = $40 million - $12 million = $28 million
Calculate the Expected Drawdown:
Expected Drawdown = Undrawn Amount × Probability of Drawdown
Expected Drawdown = $28 million × 45% = $12.6 million
Calculate the Liquidity Premium Rate (Allocated to Total Limit):
The cost of maintaining a liquidity cushion for the expected drawdown needs to be recovered across the entire facility:
Rate Charged = (Expected Drawdown × Cost of Term Funding) / Total Limit
Rate Charged = ($12.6 million × 12 bps) / $40 million = 3.78 bps.
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Q.55 Calculate the rate charged for contingent liquidity risk of a line of credit assumed to have a limit of $40 million where $12 million has already been drawn. Further, suppose there is a 45% chance that the customer will draw on the remaining credit and that the cost of term funding assets in the liquidity cushion is 12 bps.
A
3.78 bps
B
1.62 bps
C
8.37 bps
D
7.02 bps